Tuesday, 27 April 2010

Controlled inflation - solution to debt overhang?

We try to keep economics out of our blog but sometimes we just cannot resist the temptation. The reason why there is a slowly-rising tide of calls for allowing a 'controlled' rise in inflation seems to be that politicians and technocrats seem to see no chance in reversing - or even stopping - the tendency for public (and private) debt to grow. Naturally, reversing a trend that has been going on for the better part of nearly four decades is not achievable in a year or two. So the only way to reduce total indebtedness would be a painful adjustment process lasting many years - much longer than the election cycle in any western democracy. But this is not to say that it would be impossible and it is doubtful whether relying on inflation would mean that the adjustment burden is shared more equally between all groups of the population. One should also not forget that in a closed economy the citizens owe the debt to themselves in aggregate. The problem is that the debtors and the creditors are different people and therefore repayment of the debt means that the debtors carry the adjustment burden.